Mortgages

What is a mortgage?

A mortgage is a loan that is used to buy a property. It is secured on that property. If you do not keep up the repayments of the mortgage, the lender can take (repossess) the property on which it is secured so that they can get back the money they gave you. 

There are generally two forms of mortgage, which involve different ways of repaying the lender. With a repayment mortgage, your monthly repayments will include both the loan itself (capital) and any interest on it; at the beginning of the mortgage, you will be paying back more interest than capital and, during the length of the mortgage, this will gradually change so towards the end you pay more of the capital than interest. With an interest-only mortgage, you will only pay back the interest during the length of the mortgage; you will then have to pay back the capital at the end of the mortgage.

There is a special type of mortgage for people who are looking to buy a property so that they can let it out, known as a buy-to-let mortgage. The main difference from a mortgage to buy a property to live in yourself is that, the lender will look at the expected rental income rather than your earnings.

Arranging a mortgage

While you are searching for a property, you may choose to get a ‘mortgage in principle’. This is a document from a lender that explains what they might be prepared to lend you. Having a mortgage in principle may help you to show agents and sellers that you are a serious buyer who is able to afford the property. But, as the name suggests, a ‘mortgage in principle’ is not a mortgage, which you will have to apply for after your offer on a property is accepted.

A lender will take many different things into account when deciding whether to actually lend. They will ask a surveyor to value the property. They will also want to know about your own finances. In April 2014, the rules for lenders changed, so that they have to make sure you can afford to repay the mortgage. So now they will want to know about all of your outgoings and you will be under greater financial scrutiny.

Porting your mortgage

If you are selling one property and buying another, you may be save money by porting your mortgage. This means that, instead of actually paying off your current mortgage, you can transfer it to the property you are buying. This will allow you to keep your mortgage at the same interest rate, rather taking out a new mortgage, which at a higher interest rate. You could also avoid paying an early repayment charge on your current mortgage agreement.

What if I cannot keep up repayments on my mortgage?

The lender will have carried out its own checks to make sure whether you can pay back a mortgage. But, because of life changes such as losing a job or ill health, you may find that you fall behind on your repayments. You should communicate with your lender as soon as possible and if you have any problems in repaying your mortgage. This shows you are committed to repaying the debt. The earlier the lender is made aware of any problems, the easier it is for them to work with you to find a repayment solution that is fair. It is just as much in their interests to try and help you as it is the easiest way to recover their money.

What are my options if I cannot afford repayments?

Negotiations

Even if you cannot afford your full monthly mortgage repayments, you should still pay what you can afford. As mentioned before, this shows your lender you are committed to solving the problem. There are a number of options that you could discuss with your lender, including:

• reducing your monthly repayments but lengthening the term of the loan
• changing the date of repayments

This is only a short-term solution. You should ask for the lender’s policy that outlines the treatment of borrowers when they fail to repay a mortgage. This will at least give you some understanding of what they are willing or can do for you.

Getting advice

You can contact organisation such as Citizen Advice Bureau (CAB),  Shelter, Debt Support Trust or National Debtline. If you are worried about more than one debt and do not want to contact the lender directly, the CAB can do so on your behalf.

Insurance or payment protection

Certain kinds of insurance will cover you for any mortgage repayments you missed due to unemployment, accident or ill health. You should have taking out the insurance beforehand and be eligible to claim.

Support for Mortgage Interest

If you are on benefits, you may be able to claim Support for Mortgage Interest for help to make repayments on a mortgage used to purchase your home or for repairs or improvements to make sure the property is suitable to live in.

The scheme is designed to pay off interest payments, ground rent or certain types of service charge, but cannot be used to pay back the capital part of your mortgage payments, anything towards insurance policies or missed mortgage payments.

You can claim Support for Mortgage Interest if you already claim:

• Income support
• Income based Job seeker's allowance (but limited to 2 years depending on time of claim)
• Income-related Employment Seeker allowance
• Pension credit

However, assistance will depend on when you took out your mortgage. You will start receiving support 13 weeks after you issued your claim and the payment will go directly to the lender.

DO NOT DO THE FOLLOWING:

• Do not take out another loan at a higher interest rate to make your mortgage payments, as it can make matters worse by increasing your debts!
• Do not ignore letters or calls from your lender, as this will harm your chances of negotiating for a better deal!
• Do not stop paying anything if you cannot afford the full repayment, but talk to your lender and arrange payments that you can afford.

The temptation to cut and run maybe high, but abandoning your property or posting the keys to the lender can make your situation worse.

• You will still owe any outstanding debt or mortgage, including interest which will grow until the sale of the property; it will be cheaper to stay in the property until a sale is organised.
• After the sale of the property, you will have to pay for the cost of the sale and make up the difference between the outstanding debt and purchase price. (It is also worth noting that the lender would only have an entitlement to whatever it lent in the first place. If the sale price is greater than the outstanding debt, then what’s left after repayment is yours.)
• Your lender may take legal action to recover the amount. A County Court Judgement (CCJ) will appear in your credit history and could affect whether you can take out a loan in future.

What if the lender wants to repossess the property?

If you are unable to clear your debt, your lender will try to get you to repossess your property. This may mean being evicted from your home. Repossession allows the lender to sell your property and use the money from the sale to help pay off the debt. If this happens, any money left over after the debt is paid off belongs to you.

You may be able to stop the case from going to court by negotiating an arrangement with your lender. If it is not possible to stop the case from going to court, this does not necessarily mean that you will lose your home. If you are able to reach an agreement with them, you will still have to go to the court to tell the judge about the agreement, unless the court tells you the hearing has been cancelled or postponed.

If you are from a vulnerable household facing repossession (pregnant woman, the elderly, disabled and families with children) due to non-repayment of a mortgage, you may be eligible for Mortgage Rescue. It is run by the local council. You may be able to get a loan to reduce your mortgage payments or sell all or part of your home to a Registered Social Landlord (RSL). You will then be able to continue to live in your home, either as a tenant or part-owner/part-tenant. The RSL would be your Landlord (or part-landlord) and you will be paying them to stay in your home. This scheme is suitable for more long-term financial worries, not temporary ones; it will not be suitable for those whose mortgage repayment problem is not going to last for more than a few months. If you use this scheme, you could no longer have the security of owning your home and may be evicted at a later date if you fall behind on your rent.

If your lender starts a repossession action against you, the court will send you a blank defence form and guidance on how to fill it in. You should use the form to explain why you think the lender should not repossess your home and return it within fourteen days.

The court will also send you:

• copies of the claim forms that the lender submitted for possessing your home
• a hearing date
• the court’s contact details

What happens at court?

The judge can decide to:

• adjourn (postpone) the hearing
• set aside the case, which means no order will be made and the hearing is finished
• make a repossession order

There a number of different repossession orders that the court can issue. 

Outright possession order

This gives the lender a legal right to own your home on the date given in the order and is sometimes called an ‘order for possession’. The date the lender can take ownership is usually 28 days after your court hearing. If you do not leave your home by the date given in the order, your lender can ask the court to evict you.

Suspended prossession order

If you make the regular payments which are set out in the order, you can stay in your home. But if you fail to make the payments, your lender can ask the court to evict you.

Money order

This means that you have to pay the lender the amount set out in the order. If you do not make these payments, the court could send bailiffs to take away things you own or deduct money from your wages or bank account. Bailiffs cannot enter your property without your permission.

A money order cannot be used to evict you from your home but if you do not make payments set out in a money order on time, your lender could go to court again. This could result in the judge giving them a possession order.

Possession order with money judgment

A money judgment is usually added to a possession order. It means you owe a specific amount of money usually made up of your mortgage arrears, court fees and your lender’s legal costs.

A money judgment will not apply if:

• you pay your mortgage arrears and any amount set out in a suspended order
• your lender sells your home and the proceeds from sale is more than the amount set out in the money judgment

If you do not pay the amount set out in the money judgment, the lender may ask the court to carry out the instructions in the possession order and the judgment.

Time order

A time order is when the judge changes the amount you pay on your mortgage for a set time. This can be done by changing the regular amount you pay, changing the interest rate on your mortgage or by delaying the next time you have to make a payment.

If you still do not make the payments, your lender can ask the court to evict you. A time order is usually only made on certain types of loan like a second mortgage.

Is the court decision final?

After the hearing, there are a number of ways you may be able to change the order made by the judge.

Appeal against the order

If you believe that the judge was wrong to make a possession order, you may be able to appeal to the High Court. You may be able to do this if you think the correct procedures were not followed, the law was not applied properly or the facts the judge used to make a decision at the hearing were wrong. You have to appeal within 21 days.

Apply to set aside the order

You may be able to apply to set aside the possession order, for example, if you had good reason for not attending the hearing and you have a defence against the claim. 

Apply to vary a suspended possession order

If the court has made a suspended possession order, you can apply to change the terms of the order. You might want to change the terms if, for example, you cannot afford to keep up the payments ordered or the sale of your property is taking longer than the court has allowed. There will be another court hearing. You should attend the hearing with evidence to support your application.

What if my home is repossessed?

You have now been made homeless. Your local council must give you advice to help you find a new home. Depending on your circumstances, they may also be able to provide you with emergency accommodation or a more permanent home.

If you want to buy a new property in future, you must tell any new mortgage lender that your previous home was repossessed. This could make getting a new mortgage harder. If you still owe money to your previous lender, they may be able to claim some of the proceeds of your new home when you sell it.

What about the legal costs?

You may be able to get help with legal costs through legal aid if you are on a low income.

Also, if you have not received help before, you can get last-minute legal help under the Housing Possession Court Duty scheme. The scheme runs in county courts in England and Wales. It provides you with a specialist adviser on the day of your hearing to represent you or to help you come to an arrangement with your mortgage lender to pay off your debts  To find out about the scheme in your area, contact your local council or the court where your case is being heard.